Inflation raises alarms around the world

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Rising inflation sparks anxiety around the world as an increase in demand following the easing of Covid-19 lockdowns has faced supply bottlenecks and the surge energy and commodity prices.

The biggest consumer price increases in years in many countries have prompted different reactions from central banks. More than a dozen of them have raised their interest rates, but two of them are the biggest drag on the global economy: the Federal Reserve and the European Central Bank.

Their differing answers reflect differing views on whether the price rally will fuel new inflation cycles or stop instead. Which point of view is right will do a lot in shaping the course of the global economy over the next several years.

Big central banks rely on households who trust their history of keeping inflation low and the hope that there are enough underutilized workers available to contain wage increases.

Other monetary authorities are not sure whether they have gained this kind of credibility as inflation fighters yet, and see a higher risk of wage increases exploding. In poorer countries, a larger share of spending tends to go on basic necessities such as food and energy which have seen the biggest price increases, so policymakers are quicker to curb inflation.

Chile’s central bank on Wednesday raised its interest rate by a point and a quarter of a percentage point to 2.75%, surprising economists with its biggest rate hike in 20 years.

“It affects us so much, everything has increased,” said Sandra Valenzuela, a 46-year-old woman in Santiago, who lost her sales job last year and is now struggling to put enough food on the table at the table. House. “We have to adapt to the economy.

Her family have cut back on their meat consumption, claiming that it is now too expensive and are buying other products from cheaper brands.

Price hikes started to accelerate globally in March, leading to higher rates of inflation than most central bankers had expected. By August, the annual inflation rate in the Group of 20 largest economies, which account for about four-fifths of world output, hit a ten-year high.

The surge in inflation is due to a combination of economic forces that few central bankers have experienced before.

The rebound in consumer demand came much earlier and much stronger than usual following an economic contraction. But the supply has struggled to meet this demand. Expecting a more moderate and lengthy recovery, few manufacturers have added capacity during the Covid-19 pandemic, while factories and many parts of the global transportation network have been hampered by government restrictions on labor and travel.

Central bankers from the Group of 20 Major Economies, meeting in Washington, DC on Wednesday, said they expect these forces of supply and demand to balance out over the coming months and that, as they do, inflation rates ease.

Some of them have already raised their key rates, notably Brazil and Russia, which were among the first to drop in March. And as inflation rose, with no clear end in sight, other central banks joined them.

A wholesale vegetable market in Bangalore, India.


Photo:

Dhiraj Singh / Bloomberg News

Of the 38 central banks monitored by the Bank for International Settlements, 13 have raised their key rates at least once. In October, central banks in New Zealand, Poland and Romania increased their borrowing costs for the first time since the start of the pandemic. Singapore, which is tightening its policy by pushing its exchange rate up, joined this group on Thursday.

The big worry for all central bankers is that inflation is gaining ground as households begin to factor in expectations that faster inflation is here to stay in wage negotiations and companies make the same assumption. when they set prices. Where memories of high inflation rates are more recent than in the United States and Western Europe, the risk is greater.

“Emerging markets are becoming hawkish because there is a risk that inflation expectations will rise sharply,” said Bhanu Baweja, chief strategist at UBS Research.

Almost every country in South America has gone through a period of very high inflation in living memory, and prices are rising again there following a drop in new coronavirus infections. Without corresponding wage increases, many households are in financial jeopardy.

Like Chile, Colombia and Peru are also experiencing price hikes after years of controlling inflation. This has prompted central banks in both countries to tighten monetary policies as households struggle to make ends meet.

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Peru, which experienced one of Latin America’s strongest economic contractions in 2020, is struggling with its biggest consumer price increase in more than a decade. The central bank has raised its key rate since August, including an increase of half a point in October to 1.5%. Peruvian inflation hit 5.2% in September.

Most of today’s central bankers are crafting a game plan that owes much to the successful fight against the very high inflation last seen in rich countries in the 1970s. A key lesson they learn from this period is that when wages rise very rapidly to match inflation, further sharp price increases are likely and a vicious cycle ensues.

In some countries, the risk of a wage and price spiral is greater because there are few workers who can be recruited to help meet growing demand.

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This is a particular problem in central Europe, where a number of central banks have raised their key interest rates in recent months. Emigration to richer Western Europe and low birth rates have reduced the number of workers. According to projections by the statistical agency of the European Union, the Polish population could drop by more than a fifth by 2100.

“Central and Eastern Europe is one of the regions of the world where we believe the risk of higher and sustained inflation over the next few years is greatest,” said Liam Peach, economist at Capital Economics.

For Fed and ECB policymakers, the threat of a wage and price spiral seems weaker, as they also rely on memories of a long period of very low inflation to anchor household expectations on future price increases. This view has recently been challenged by economists, including Fed economist Jeremy Rudd, who argues that the evidence just doesn’t show that expectations actually drive inflation.

Rising food and energy prices have also pushed up inflation in much of sub-Saharan Africa. Ethiopia’s central bank raised its commercial bank lending rate from 13 percent to 16 percent in August and doubled the cash reserve ratio requirement for commercial banks to 10 percent.

Rising gasoline prices drove inflation in the United States


Photo:

Xinhua / Zuma Press

Inflation in the largest wheat producer in sub-Saharan Africa jumped to 30% in September from 26.4% the month before, as a mix of conflict, blocked trade routes and locust infestations reduced the food production.

In most parts of Asia, central banks remain cautious about tightening monetary policy too early for fear of undermining weak economic recoveries that have not been fueled by large official stimuli.

Chinese producers have so far absorbed rising raw material prices, hurting their profitability. Chinese factory exit inflation jumped 10.7% in September, the highest in nearly 25 years, largely due to higher coal prices. The country’s consumer inflation rose 0.7%, well below the official target of around 3%.

Speaking at the G-20 forum on Wednesday, China’s central bank governor Yi Gang said the country’s inflation was generally “mild.”

In Turkey, President Recep Tayyip Erdogan sacked three senior central bank officials this week. He demanded lower interest rates to encourage economic growth, raising concerns among investors who say rate cuts will worsen inflationary pressures. Turkey’s annual inflation hit 19.58% in September, its highest level in 2.5 years, according to the country’s official statistics agency.

Elsewhere, governments are resorting to measures that were common in the 1970s, but have since been abandoned in most countries. Argentina’s Home Secretary of Commerce Roberto Feletti on Wednesday announced a 90-day price freeze on 1,247 products in stores amid concerns over rising food prices.

“We must prevent food prices from eroding wages,” he said.

Write to Paul Hannon at [email protected], Ryan Dube at [email protected] and Stella Yifan Xie at [email protected]

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